Mezzanine development finance works to bridge the gap between a development loan and the amount of funds that the developer has to put into the project.  The Mezzanine funder will usually take a second charge on the development, sitting behind the first charge of the ‘senior debt’ loan provider.

 

Alpha Commercial Finance will invest in a development project usually on the understanding and agreement with the developer that they will receive their initial investment back plus a small amount of interest, in addition to an agreed percentage of the development’s profit. Alternatively, we could charge a higher rate of interest or have an agreed fee.

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Debt finance applies to any money you borrow, such as bank loans, mortgages or leasing of equipment. Equity finance refers to investment opportunities, where you exchange shares in your company for funding. Mezzanine finance provides the additional loan while ensuring the funder obtains their required rate of return via a loan and secured by the option to convert to equity in the event of default.

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The technicalities behind mezzanine finance will vary depending on the development. A typical example is where a loan is taken out, which converts into an equity share after a set period or a specific event. This means the borrower has the chance to pay back the loan (either as a lump sum or through instalments) before the agreed timeframe if they are financially able. If they aren’t, the lender can recover the balance by converting it to shares in the business, which will hopefully increase in value over time.

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Alternatively, shares may be used as a form of collateral (similarly to the way assets would in an asset-based loan. At the same time, the lender is secure in the knowledge that they in the event of default they can convert into shares that hopefully will grow in value. In these contexts, the lender would get interest payments as in a standard loan, plus, in the event of default or another event, a share of profits.

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Mezzanine finance can also be used alongside other equity loans or investment, so may offer additional support for those enterprises that need it.